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NBFC - Core Investment Companies (CICs) in Bhopal

Over last some years, RBI has carved out some specialized NBFCs like
Core Investment Companies (CICs), NBFC- Infrastructure Finance
Companies (IFCs), Infrastructure Debt Fund- NBFCs, NBFC-MFIs and
NBFC-Factors being the most recent one.

It has been felt necessary to explain the rationale
underlying the regulatory changes and provide clarification on certain
operational matters for the benefit of the NBFCs, members of public,
rating agencies, Chartered Accountants etc. To meet this need, the
clarifications in the form of questions and answers, is being brought
out by the Reserve Bank of India (Department of Non-Banking
Supervision) on Specialized NBFCs with the hope that it will provide
better understanding of the regulatory framework.

The information given in the FAQ on Systemically Important
Core Investment Companies (CICs-ND-SI) is of general nature for the
benefit of the public and the clarifications given do not substitute
the extant regulatory directions/instructions issued by the Bank to the
specialized NBFCs.

Ozg NBFC Experts

Email: ask@nbfc.in

1. What is a Systemically Important Core Investment Company (CIC-ND-SI)?

Ans. A CIC-ND-SI is a Non-Banking Financial Company

(i) with asset size of Rs 100 crore and above

(ii) carrying on the business of acquisition of shares and
securities and which satisfies the following conditions as on the date
of the last audited balance sheet :-

(iii) it holds not less than 90% of its net assets in the
form of investment in equity shares, preference shares, bonds,
debentures, debt or loans in group companies;

(iv) its investments in the equity shares (including
instruments compulsorily convertible into equity shares within a period
not exceeding 10 years from the date of issue) in group companies
constitutes not less than 60% of its net assets as mentioned in clause
(iii) above;

(v) it does not trade in its investments in shares, bonds,
debentures, debt or loans in group companies except through block sale
for the purpose of dilution or disinvestment;

(vi) it does not carry on any other financial activity
referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except
investment in bank deposits, money market instruments, government
securities, loans to and investments in debt issuances of group
companies or guarantees issued on behalf of group companies.

(vii) it accepts public funds

2. Will existing Core Investment Companies
(CICs) which had previously been exempted from registration and whose
asset size is less than Rs. 100 crore again be required to submit
application for exemption?

Ans:
Existing CICs which were exempted from registration in the past and
have an asset size of less than Rs 100 crore are exempted from
registration in terms of section 45NC of the RBI Act 1934, as stated in
Notification No. DNBS.(PD) 220/CGM(US)-2011 dated January 5, 2011, and
as such are not required to submit any application for exemption.

3. Would existing CICs which had previously
been exempted from registration and whose asset size is less than Rs.
100 crore be required to submit Statutory Auditor's Certificate with
reference to position as on March 31 of each year to the effect that the
company continues to comply with the earlier norms based on which it
was treated as a 'Core Investment Company'.

Ans:
No, Existing CICs which have been exempted from registration in the
past and have an asset size of less than Rs 100 crore are exempted from
registration as stated in Notification No. DNBS.(PD) 220/CGM(US)-2011
dated January 5, 2011. As such they are not required to submit any
auditor’s certificate that they comply with the requirements of the
Notification.

4. A single group is having under its fold
four to five prospective Core Investment Companies with an aggregate
asset size of more than Rs. 100 crore. In such a situation, which
company among the group companies is required to seek registration as
CIC with the Bank.

Ans:
All companies in the group that are CICs would be regarded as
CICs-ND-SI (provided they have accessed public fund) and would be
required to obtain a Certificate of Registration from the Bank.

5. A single group is having under its fold
various prospective Core Investment Companies with an aggregate asset
size of more than Rs. 100 crore. One of the entities has raised / holds
public funds (one of the pre requisites for qualifying as a
CIC-ND-SI). In such a situation, whether every CIC within the group or
only the parent CIC or the specific entity that has raised/ holds
public funds would be regarded as CIC-ND-SI, and thus would be required
to seek registration as CIC-ND-SI with the Bank.

For Example: HCo is the parent group CIC
holding 100 per cent equity capital of A, B and C, all of which are
also CICs . In case C has accessed public funds, whether HCo as well as
A, B and C must seek registration as CIC-ND-SI or will just C need
registration?

Ans: In
such a case only C will be registered, provided C is not being funded
by any of the other CICs either directly or indirectly.

6. Whether the investment of a company in its
subsidiary's subsidiary (step down subsidiary) will be taken into
account for determining not less than ninety percent of its net assets.

Ans: All direct investments in
group companies, as appearing in the CICs balance sheet will be taken
into account for this purpose. Investments made by subsidiaries in step
down subsidiaries or other entities will not be taken into account for
computing 90 percent of net assets.

7. Would Current Liabilities also form part
of Outside Liabilities? What will be the treatment of DTL, Advance Tax
Due and Provision for Income Tax? Will they be Outside Liabilities?

Ans: Anything that has to be repaid will be an outside liability.

8. In case an existing NBFC-ND-SI is
converted into a CIC-ND-SI after fulfilling the stipulated criteria,
will the existing CoR continue or will a fresh application need to be
made?

Ans: As there would be a separate application form for CICs-ND-SI, they would have to apply afresh.

9. What items are included in the 10% of Net assets which CIC’s/CIC’s-ND-SI can hold outside the group?

Ans: These would include real
estate or other fixed assets which are required for effective
functioning of a company, but should not include other financial
investments/loans in non group companies. It would however include
investments in other group entities that are not companies eg: Trusts
etc.

10. Is there an enabling provision for use of statutory accounts based on some date other than 31st March, such as December 31st?

Ans: While such accounts could be
taken into account in view of the fact that developments after balance
sheet date are also taken into account, all NBFCs including CICs-ND-SI
would mandatorily have to finalise their accounts as on March 31 of
the year, and submit annual auditors certificate based on this figure.

11. Whether investments in a group entity
other than a Company, say partnership firms, LLPs, Trusts, Association
of Persons, etc by CICs-ND-SI could be regarded as investments in Group
Companies for the purpose of calculating 90% investment in Group
Companies.

Ans: No, only investments in
companies registered under Section 3 of the Companies Act 1956 would be
regarded as investments in Group companies for the purpose of
calculating 90% investment in Group companies. However, CICs/CICs ND SI
can deploy balance 10% of their net assets in group entities other
than a company.

12. Are CICs-ND-SI exempt from the NBFC (Non-Deposit holding) Prudential Norms Directions 2007?Ans: No, they are only exempt from
norms regarding submission of Statutory Auditor Certificate regarding
continuance of business as NBFC, capital adequacy and concentration of
credit / investments norms.

13. Would CICs-ND-SI require NOC in terms of
Regulation 7 of FEMA (Transfer or Issue of Any Foreign Security)
Amendment Regulations Act 2004 in case they want to invest abroad?

Ans: Yes, as they are regulated
by RBI, they would require NOC from Department of Non-Banking
Supervision (DNBS) for making investments in the financial sector.
However, a registered CIC making investments in the non-financial sector
need not obtain prior approval from the Department of Non-Banking
Supervision (DNBS), RBI. It will only need to report such investments
to the Department within 30 days of such investment.

14. Do CICs which are exempt from registration, and investing overseas need NOC from DNBS?

Ans: Exempted CICs desirous of
making overseas investment in financial sector shall first need to hold
a Certificate of Registration (CoR) from Reserve Bank of India (the
Bank) and will have to comply with all the regulations applicable to
registered CIC-ND-SI. However, they need not obtain NOC from the Bank
if their investments overseas are in the non-financial sector.

15. Whether NBFCs already registered with the
Bank as category “B” company whose asset size is below Rs. 100 crore,
but fulfilling the CIC criteria, can seek voluntary deregistration (as
such companies are not otherwise required to get registered with the
Bank under the new norms)? If so, which source should be relied upon
viz certificate from Statutory auditor or audited balance sheet for one
year or more?

Ans: Yes, CICs presently
registered with the Bank but fulfilling the criteria for exemption
under Notification No 220 dated January 05, 2010 can seek voluntary
deregistration. Both audited balance sheet and auditors certificate are
required to be submitted for the purpose.

Ans: CICs having asset size of
below Rs 100 crore are exempted from registration and regulation from
the Reserve Bank, except if they wish to make overseas investments in
the financial sector.

17. As per the definition of CIC, only
investment/loans/debt in group companies is eligible for computing 90%
exposure? What treatment is to be given to company’s investment in
group’s partnership concerns?

Ans: CICs can invest balance 10% of Net Assets in such concerns.

18. If a company is unlisted, would the terms
of block deals apply? What is the minimum number/value of shares
transferred for it to be defined as a block deal/block sale.

Ans: The term used in the CIC
circulars is block sale and not block deal which has been defined by
SEBI. In the context of the circular, a block sale would be a long term
or strategic sale made for purposes of disinvestment or investment and
not for short term trading. Unlike a block deal, there is no minimum
number/value defined for the purpose.

19. Can CICs/CICs-ND-SI accept deposits?

Ans: No, CICs/ CICs-ND-SI cannot accept deposits. That is one of the eligibility criteria.

20. What does the term public funds include? Is it the same as public deposits?

Ans: Public funds are not the
same as public deposits. Public funds include public deposits,
inter-corporate deposits, bank finance and all funds received whether
directly or indirectly from outside sources such as funds raised by
issue of Commercial Papers, debentures etc. However, even though public
funds include public deposits in the general course, it may be noted
that CICs/CICs-ND-SI cannot accept public deposits.

21. In the definition of public funds, what do the term “indirect receipt of public funds” mean?

Ans: Indirect receipt of public
funds means funds received not directly but through associates and group
entities which have access to public funds.

22. Can CICs issue guarantees and will this be considered part of definition of public funds?

Ans: Yes, CICs may be required to
issue guarantees or take on other contingent liabilities on behalf of
their group entities. Guarantees per se do not fall under the
definition of public funds. However, it is possible that CICs which do
not accept public funds take recourse to public funds if and when the
guarantee devolves. Hence, before doing so, CICs must ensure that they
can meet the obligation there under, as and when they arise. In
particular, CICs which are exempt from registration requirement must be
in a position to do so without recourse to public funds in the event
the liability devolves. If unregistered CICs with asset size above Rs.
100 crore access public funds without obtaining a Certificate of
Registration (CoR) from RBI, they will be seen as violating Core
Investment Companies (Reserve Bank) Directions, 2011 dated January 05,
2011.

23. What is a Group company?

Ans: For the purposes of
determining whether a company is a CIC/CIC-ND-SI, ‘companies in the
group’ have been exhaustively defined in para 3(1) b of Notification
No. DNBS. (PD) 219/CGM(US)-2011 dated January 5, 2011 as “an
arrangement involving two or more entities related to each other
through any of the following relationships, viz.,Subsidiary – parent
(defined in terms of AS 21), Joint venture (defined in terms of AS 27),
Associate (defined in terms of AS 23), Promoter-promotee [as provided
in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997] for
listed companies, a related party (defined in terms of AS 18) Common
brand name, and investment in equity shares of 20% and above).”

24. Is the definition of group company the same for CICs/ CICS-ND-SI as that for NBFCs?

Ans: No the definition is not the
same for CICs / CICs-ND-SI and NBFCs. The definition of group Company
for the purpose of classifying a company as a CIC / CICs-ND-SI is much
more exhaustive and gives a benefit to the CICs/CICs-ND-SI.

25. How can a company register as a CIC-ND-SI?

Ans: The application form for
CICs-ND-SI available on the Bank’s website can be downloaded and filled
in and submitted to the Regional Office of the DNBS in whose
jurisdiction the Company is registered along with necessary supporting
documents mentioned in the application form.

26. A CIC-ND-SI should have 90% investment
within the group, and in terms of current exposure norms, NBFCs-ND-SI
are permitted only 40% of both lending and investment within any group.
Therefore, no NBFC as it stands, would be able to become a CIC without
breaching the NOF, CRAR or Concentration Norms, since its entire
business is in a subsidiary. However, an NBFC may voluntarily seek to
become a CIC-ND-SI since it brings clarity to the holding structure in
their organization. How would this issue be resolved? Could NBFCs-ND-SI
be provided exemption from Capital adequacy/exposure norms during the
transition period, just as unregistered CICs-ND-SI are given 6 months
time.

Ans: The NBFC would have to apply
to RBI with full details of the plan and exemptions could be
considered on a selective basis on the merits of the case.

27. A company has investments in Group
companies but does not meet the criteria of principal business as
defined in terms of asset-income criteria to be as an NBFC. Can the
company still be registered as a CIC or does it need to first register
as an NBFC?

Ans: CICs need not meet the principal business criteria for NBFCs.

28. If a company is a CIC but does not exactly meet the criteria specified, does the company need to register as NBFC?

Ans: A holding company not
meeting the criteria for a CIC laid down in para 2 of Notification No
DNBS. (PD) 219/CGM(US)-2011 dated January 5, 2011 would require to
register as an NBFC. However, if such company wishes to register as
CIC-ND-SI/ be exempted as CIC, it would have to apply to RBI with an
action plan achievable within the specific period to reorganize its
business as CIC. If it is not able to do so, it would need to comply
with NBFC requirements and prudential norms.

29. Whether a Holding Company which is not
able to comply with the CIC criteria (all four conditions), would still
need to comply with NBFC requirements and prudential norms even in the
event that it is not satisfying the asset-income criteria. (For
example: the holding company owns 60 per cent equity in another group
company. Therefore, it does not qualify as a CIC. Further, the income
from financial assets is also less than 50 per cent of total income.
Whether such a company would require compliance with NBFC norms).

Ans: Yes, Section 45 IA of the
RBI Act states that a company requires a COR” to commence or carry on
the business of NBFI”. Therefore it requires the COR before it becomes
NBFC.

30. A group would like to set up a CIC-ND-SI
in the group to rationalize the set up. However, no company can
commence the business of NBFI without COR from RBI. Therefore the
proposed company would have to apply for COR before transferring
shares from different companies to the CIC-ND-SI. But at that time the
company would not be eligible in terms of the requirements, as it
would not have 90% of net assets as investment in group companies. What
should the company do?

Ans: The company would have to
apply for COR to RBI, giving a business plan within a prescribed time
period of one year in which it would achieve CIC-ND-SI status. In case
the company is unable to do so, the exemptions would not apply and the
company would have to comply with NBFC capital adequacy and exposure
norms.

31. Whether CICs that are exempt from
registration either because they have an asset size of less than Rs 100
crore or are not accessing public funds are required to register as
NBFCs?

Ans: CICs that (a) have an asset
size of less than Rs.100 crore irrespective of whether they are
accessing public funds or not and (b) have an asset size of Rs. 100
crore and above and are not accessing public funds have been exempt
from registration with the Bank under Section 45IA of the RBI Act, 1934
in terms of notification No. DNBS.PD.221/CGM(US) 2011 dated January 5,
2011. Thus, they are not required to register with the Bank at all. As
this is an exemption given under Section 45NC of the RBI Act, 1934,
they are not required to approach the Bank at all.

32. Would a similar benefit apply to NBFCs
i.e. would NBFCs with an asset size of less than Rs 100 crore and not
accessing public funds be exempted from registration with the Bank?

Ans: No this exemption is
specifically given to CICs only. NBFCs other than CICs are not covered
by this or any other aspect of the CIC Directions and would have to
register with the Bank and comply with all applicable Directions of the
Bank as issued from time to time.

33. Should Net assets include operating assets?

Ans: Net assets have been defined
in Notification No. DNBS.(PD) 219/CGM(US)-2011 dated January 05, 2011
(para3(1)e) specifically for the purpose of defining a CIC. As such
they will only include the items specifically mentioned therein,
irrespective of whether any of these qualify as operating assets or
not.

34. Definition of Group Companies should include LLPs and Partnerships in the Group?

Ans: Neither LLPs nor
Partnerships are companies and hence have been deliberately excluded
from the definition of Group Company. Further, in view of the loose
structure and regulatory framework for these entities it is felt that
they should not be included in the definition. However, such
investments by CICs have been allowed in the additional 10% of net
assets.

35. While instruments that are compulsorily
convertible into equity shares within a period not exceeding 10 years
from the date of issue are excluded from Outside Liabilities, in terms
of the Companies Act such instruments are excluded from the definition
of ‘public deposit’ if they are convertible with a period of 20 years?

Ans: The period of 10 years was
specified as a prudential measure not necessarily in alignment with a
provision of the Companies Act. Moreover, the issue here is not public
deposits but Outside Liabilities.

36. Unlike other NBFCs, CICs ND-SI can no
longer make overseas investment or raise ECB under automatic route or
obtain bank finance for acquisition of shares?

Ans: The Directions on CIC-ND-Sis
have not restricted them from making overseas investment or raising
ECBs on the lines of other NBFCs. Regarding the issue of bank finance,
currently bank finance is not allowed for investments in equity which
is however only 60% of net assets of a CIC. (and would therefore be a
lesser percentage of total assets). CICs-ND-SI may have access to bank
finance to the extent it is not used for investment in shares.

37. If one of the small CICs in a group does
not access public funds why should it register based on the condition of
aggregate asset size?

Ans: As already clarified in the
FAQs, a CIC that does not access public funds is exempt from
registration irrespective of having other CICs in the Group that access
public funds. Illustratively, if A is a CIC and B and C are also CICs
and Group Companies of A. Provided A does not access
any form of public funds including any funds from any Group Company
including B and C, it would not require to register as a CIC. If A, B
and C do not access public funds in any form none of them would be
required to register as a CIC.

38. Will adjusted net worth of all the CICs in the Group also be aggregated for compliance purposes ?

Ans: Adjusted net worth (ANW) is a
concept akin to capital requirement wherein the ANW should not be less
than 30% of the risk weighted assets (RWA). In cases where asset size
is aggregated, all the CICs within the group will be registered as
CIC-ND-SI ANW will be applicable individually.

39. There is an apparent anomaly in the
definition of ‘public funds’ as the moment public deposits is included
in the definition of ‘public funds’ and CICs will be deemed to have
raised public deposits and will therefore become an NBFC subject to
exposure norms?

Ans: Even though public funds
include public deposits in the general course, it may be noted that
CICs cannot accept public deposits. It may further be reiterated that
no NBFC can accept public deposits without specific permission of the
Bank even if it holds a CoR from the Bank.

Source: RBI

Ozg NBFC Experts

Email: ask@nbfc.in

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